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Akerlof, Shiller and the rest of the looters that think “good government” is anything but the most hilarious oxymoron in etymological history should be fed to the lions.

They argue that “we need to restructure our fragmented regulatory structure.” It was good government, in the name of “public interest” that created the fragmented system in the first place.

The fragmentation really began with the dawn of the National Banking Era during the Civil War. After 25 years of successful “free-banking” in the United States, the grabbing hand realized it was much more difficult to extract tribute from state-chartered banks which were free to issue their own notes than it was to extract tribute from federally-chartered banks that had a monopoly on note issue. Thus, with the National Banking Acts of the early 1860s died the state-banking system (and particularly the virtually laissez-faire, successful Suffolk System in New England), the federal government overlaid a vast system of inefficient regulations on top of some of the worst features of the “free” state-banking era.

What were those features? Well, state banks were required to have to purchase state-government bonds (called stocks at the time) to back 100% of their note issues. When the value of those bonds inevitably fell (due to lost confidence or excessive government spending) the banks were forced by law to purchase even more government bonds to back up their notes, or to reduce their outstanding note issue (the way to do that was to reduce its loan portfolio, causing a serious credit contraction). So banks were forced by states to support an inflationary finance system – much like the Kings and Queens of earlier times did the same. Second, state banks were limited in what they could invest the rest of their assets in aside from their gold stock (fractional reserves) and state bonds – thereby limiting the amount of money they could earn, and the amount of interest they could pay to attract depositors.

And what did the national banking era do? It simply adopted these public interest regulations and grafted more on top of them. In the early 1860s, the federal government created the OCC in the Treasury Department, to oversee the new national banking system. It taxed the state banknotes out of existence. It chartered national banks, requiring them to hold federal government securities in exchange for their note issue privileges. Congress, also for the first time, issued its first fiat currency (the Continental Congress did it before the Revolution ended) – the Greenbacks. The record of the national banking system was disasterous – with serious panics inĀ 1873, 1884, 1890, 1893 and 1907.

Why these panics? Because of the National Bank Era regulatory reforms. In addition to making the currency issue in the US extremely insensitive to changes in customer demand, National Bank Era regulations did not permit banks to branch, nor did they permit clearing agencies and other emergent institutions to serve as important lenders of last resort during times of panics.

After the serious panic of 1907 … what do you think happened? A movement to”restructure the fragmented regulatory structure,” just like we hear today. And what did they do? They further fragmented the regulatory structure. Without addressing the fundamental problems inherent in the National Banking System (itself grafted onto the problems of the state banking system) “we” yet again grafted the Federal Reserve System onto the old system.

The Fed quickly helped ignite the Panic of 1921 through its aggressive rediscounting of bank commercial paper (i.e. opening the discount window for non-emergency uses), and was obviously not at its peak performance during the monetary contraction of the Great Depression (twice – once from 1929 – 1933, and again when it raised reserve requirements to deepen the 1937 recession).

What happened? Yet another layer of New Deal Banking reforms that further weakened the system – without addressing the fundamental problems. Rather than allowing branch banking, we got deposit insurance, with all of its moral hazard problems. Without thinking about the problems of over-expansion of credit, we get the abandonment of the gold standard. Without thinking about the problem of disintermediation, we get Regulation Q. Without thinking about global competition, we get Glass-Steagall. All of this on top of a system that never had its fundamental problems addressed.

And now Akerlof and Shiller want to graft new reforms onto the old? And they think that for the economy to work well, we need good government? Neither is true. The government has never done anything useful in terms of bank regulation – it has only served to extract revenue from the financial system and its customers, to destabilize the system in the name of stability, and to enact reforms to fight the prior panics without addressing what might cause the next. Why do these esteemed folks seem to think that after 230 years of a horrendous record of intervention in the banking system, that NOW we will somehow get it right. That NOW we will somehow avoid the influence of the special interests lurking around every corner. That NOW we know how poeple’s demand for money will change at any moment. That NOW we know exactly how the Fed can better control the money supply in the face of such massive uncertainty in how banks change their reserve and lending behavior, and how customers hold currency.

They incorrectly argue that we have had a “debate” about the proper role of government throughout history. It is not a debate when the same side has “won” every time. At every turn when “we” have had the choice between more or less government, which side do you think has won. So indeed this is the time for a debate … for the first time since 1787 … but suffer no illusions which side will win, particularly when the “experts” promoting good government roll out “evidence” for the effective public interest service in the banking system such as this:

“For example, massive numbers of S&Ls failed during the decade (the 1980s). But government protections isolated this collapse into a microeconomic event that, while it cost taxpayers quite a bit of money, only rarely cost them their jobs.”

What a bunch of malarkey! It was precisely the rickety regulatory structure that set the S&L’s up to fail when interest rates rose (think again of the effect of Reg Q). It was the presence of deposit “insurance” via the FSLIC that set these banks up for massive moral hazard problems, and allowed their depositors to be blissfully ignorant of the risks the companies were taking that they were lending money to (that what a depositor IS after all). And if government was good enough to set up the FSLIC safety net … then why the heck was it so underfunded? To say it cost the taxpayer quite a bit of money was the understatement of the year, until the Obamessia made spending trillions sound prudent. The crisis cost taxpayers upward of $200 BILLION dollars. That used to mean something. And it is funny how these “esteemed” economists look at only the “seen” effects of such spending – arguing that it rarely cost taxpayers jobs.

REALLY? What about all of the jobs that were never created because political discretion directed $200 billion of resources toward the FSLIC and the S&L’s and their depositors and not toward where greedy profit-seekers thought it best be employed? You only convince people the “unseen” matters when arguing that the Obamessiah’s stimulus plan will “SAVE or create 4 million jobs.” Notice how different that was from the campaign promise to CREATE 4 million jobs. I actually agree that saving jobs from being lost is just as good as creating a new one (if economically meaningful) … so why then can these economists argue with a straight face that the S&L crisis did not cost any jobs. If it did not, then their new President certainly has no right to brag about saving jobs.

It is tiring watching citizens allow people like Akerlof and Shiller set the terms of the debate. There is no public antipathy toward regulation – and no evidence that the banks or the US in general is less regulated today than in the past. Just saying so does not make it so (unless you win the Nobel Prize I guess). And the view that the Depression was caused by Capitalism is so far from being realistic that even writing here is embarrassing. When the government was setting rules and playing referree in the banking system, it set the stage for the most catastrophic collapse we have seen … and the government bumbled through by ONLY seeing the Depression last for 17 years (or to be generous, 13 years).

So even if the role of government was to mute the changes in unemployment caused by changes in consumer demand (and this crisis has NOT been caused by changes in demand), the history of government demonstrably shows that it has not nearly the knowledge to do it well, nor has the incentives to do it right (e.g. how much of the porkulus money is being wasted each day?). Furthermore, where has it ever been the role of government to deal with unemployment? I’d love to see that in Article 1, Section 8. If you want Congress to have such powers, write a new constitution. But don’t parade around and tell me that it is a role of government.

And this last point really tickles me: “Moreover, entrepreneurs and companies do not just sell people what they really want, sometimes they sell people what they think they want, and sometimes snake oil.” REALLY … and I thought you were describing your friendluy “good government.” Do companies make people patronize them absent the special privilege of government which requires it? How about government? Let’s think of the financial sector itself … who makes people deal with financial transactions that are snake oil? Could it be that the Federal money production monopoly makes every person use Fed money in every single transaction that they engage in? Did I have the choice to use a different currency, privately supplied? And what happens if I, as a business, refuse to accept the Fed money? And did I consent to having the value of my money decline by 60% over the course of my lifetime? What was that about snake-oil?

And what was that about selling people things they think they want, and sometimes snake oil? I am told to support public schooling because parents are too stupid to send their kids to school on their own … and I must pay thousands per year for an ineffective, overspending cesspool of bureaucracy against my wishes. If I do not pay my property taxes, they take my house. And what about the bailout? Do I want to “invest” in GM or Citi or Bank of America? And what about the stimulus? Do I want to build light-rails all around the country? And these things are not being “sold” to me.

The challenge for the US and Obama is not to “invent” a new and better version of the capitalist game – it is to find out where that game ever went. And it is NOT a game? Ask them if they know what capitalism is? They don’t even have a clue.

3 Responses to “Feed Akerlof and Shiller to the Animals”

  1. Harry says:

    I paid my two bucks for the Journal, and read the same piece, too.

    Tiresome stuff, but you have to read such bad writing to keep up.

    But let’s stay positive: thank goodness there is so much raw meat for Wintercow to feed the animals!

  2. Feed Akerlof and Shiller to the Animals | The Unbroken Window « The Daily Barker says:

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  3. […] major problem with government intervention in Money and Banking over the centuries has really been the fact that each new round of regulation is laid over the […]

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